Where the deals are: Top Brokers shape RE industry

They're all in the business of bringing buyers and sellers, or lessors and lessees, together in an increasingly complex commercial real estate marketplace. Some are getting the job done by linking office buildings together in Manhattan, and others by listening to the human resources concerns of their corporate clients. Still, others are breaking with convention to find creative ways to get new development out of the ground.

The nation's top brokers are a busy bunch these days. Because they're able to bring together technical and interpersonal expertise with in-depth market knowledge, brokers represent the source people tap when it's time to get real deals done. Some of those deals follow below - recently done by the cream of the crop of today's commercial brokerage industry, along with their individual perspectives on the local markets in which they operate.

The Southeast Jones Lang LaSalle vice president Richard D. Knowlton is leasing director of Sanctuary Park, a 150-acre office park in metro Atlanta's hot upper Georgia-400 corridor. Owned by J.P. Morgan Strategic Property Fund, the park has about 360,000 sq. ft. of existing space in two buildings, with work now underway on a third structure totaling 150,000 sq. ft. This latter building will be anchored (to the tune of 70,000 sq. ft. for a 10-year term) by the U.S. headquarters of Lease Plan USA, an international fleet management company.

The deal closed this past spring. Represented by Atlanta-based Colliers Cauble & Co., Lease Plan USA chose Sanctuary Park and its location for economic, infrastructure and human resources reasons, according to Knowlton. Prior to the 1990s, office space development in this corridor was largely of the campus-style variety; in the cost-conscious current decade, non-ostentatious mid-rise structures are more in vogue.

A specialized area "To this day, [the Ga.-400 corridor] offers office users significant savings over the adjacent Central Perimeter, as well as the other markets closer to Atlanta's central business district," says Knowlton. "This market doesn't have the high-rise type of development you see closer to Atlanta's core, which has allowed rates to remain lower - especially for users in Lease Plan's size range."

Infrastructure also entered into the equation. "As office space users and companies in general continually become more technologically advanced, you need to be able to accommodate the hardware they want to bring into a building," says Knowlton. This can require special electrical conduits incorporated into building design, supplemental generator support and/or the availability of fiber-optics, he notes.

"These were all things that helped Sanctuary Park win this deal; these requirements are becoming increasingly more common on deals of this size," he says.

Human resources issues have become an important part of many deals, according to Knowlton. "The human resources side of site decisions has come up more in recent years, mostly because of the tight labor situation in Atlanta and other markets," he notes. "Companies now focus not only on fashioning functional and economic deals for their facilities, but also on putting together a workplace that will attract and retain good employees."

Sanctuary Park's heavy emphasis on maintaining a natural park environment with walking trails and other amenities fit in with Lease Plan's view of how to effectively recruit and retain, according to Knowlton. The park's proximity to an extensive variety of housing was also a key to the deal getting done, he notes, providing employees with the opportunity to minimize commuting times in the traffic-clogged sprawl of suburban Atlanta.

'Ahead of the curve' Lead stories in Time magazine and pronouncements by the Sierra Club notwithstanding, don't place too much emphasis on traffic congestion when you are thinking about the Atlanta market, says Sam Holmes, executive managing director in the Atlanta-office of New York-based Insignia/ESG.

"I genuinely believe the situation is not as bad as has been reported," says Holmes. "As a matter of fact, I think we are ahead of the curve in dealing with the issue on the state level," he notes, citing recent state transportation initiatives by Georgia's newly elected governor Roy Barnes. "As we all know in this business, perception is often reality, so we have to be able to address companies' concerns about traffic," he says.

Holmes and others who sell Atlanta as a business location have to address these concerns quite often. "Traffic is definitely one of the first things companies looking at the area mention," he notes. "But even though Atlanta has been written up as having the longest commutes of any city in the country," says Holmes, "there are a number of cities across the nation where commuting, if not worse, is just as challenging."

Recent Atlanta-area deals handled by Holmes include a 110,000 sq. ft. consolidation of Atlanta facilities for Chicago-based CNA Insurance and a 50,000 sq. ft. regional headquarters lease for Cincinnati-based Kroger Co. When it comes to factors that affect demand for Atlanta-area facilities, "We are unfortunately beginning to see some problems with labor availability and cost for employees of customer-service and call-center facilities," he reports.

Meanwhile, on the supply side, "Atlanta continues to be blessed," says Holmes. "Atlanta not only has a number of top REITs active, but also a number of aggressive and entrepreneurial regional and local developers. Atlanta is not experiencing the shortage of office space that other cities are. And we all know that, in the relocation business, it is important for a metro area to have a supply of existing space available."

The Mid-Atlantic In the same way Atlanta brokers must react quickly to changing real estate requirements (and dislikes), KLNB Inc. director of investment sales Marc Geffroy hit the ground running in 1999. In February, he co-brokered (along with KLNB's Peter Framson) the sale of 103,000 sq. ft. Best Buy Metro Center for $24 million, or a hefty $233 per sq. ft. Two months later, he closed (along with Sam Hodges and Brad Kotz, both of KLNB) the sale of nearly adjacent, 119,000 sq. ft. Springfield Commons for $27 million, or $227 per sq. ft. Both centers, located in Springfield, Va., were purchased by The RREEF Funds, Chicago.

"These were exceptional deals," says Geffroy. Taken together, the centers sold for $61 million at a 9% cap rate, he reports. "On a per-sq. ft. basis, the price exceeded that of any recent suburban office building sales."

Springfield is a suburb of Washington, D.C., that is located southwest of Alexandria and anchored by the I-395/I-495 interchange. The area around the two centers is hot, according to Geffroy.

"The [area surrounding] Springfield Mall is rapidly becoming 'ground zero' for shopping in the Springfield trade area, given its proximity to the new Washington Metro/Virginia Rail Express station," says Geffroy. "Centers in this area also draw high-income consumers from a wide radius throughout northern Virginia, helped by close proximity to major highway and Interstate connections."

Investor interest in retail is strong among pension funds, private investment groups and European investors, according to Geffroy. At the same time, there is little that is "officially" on the market, he notes.

"Many of the deals I've done in the past six months are what I call 'stealth deals,'" says Geffroy. "These are negotiated deals where you don't have a bona fide listing. They are more like deals where you go with a buyer to meet the owners of a particular center, and ask them what their 'number' (or price for the center) is."

Tax arbitrage makes single shopping-center deals particularly attractive for high-net-worth German investors these days, according to Geffroy. "REITs are still out of the picture," he notes. "Some REITs are trying to form joint ventures with pension funds and insurance companies to raise some cash, But I haven't seen any 'big hits' coming from that yet."

The West In late 1998, World Bazaars, a home decor and gift item business, needed warehouse space in Ontario, Calif., to the tune of about 1.2 million sq. ft. The space had to have 40-ft.-clear ceilings, as opposed to the more conventional 32-ft. ceiling, to accommodate an $8 million, high-tech automated racking system. They had to lease their existing 700,000 sq. ft. facility in City of Commerce, and they needed to get all of this done in less than three months.

The action began in December 1998. "There were a limited number of places we could go to in the Ontario market at the time," says Anthony J. Brent, senior vice president and partner of City of Industry-based Lee & Associates, the broker representing World Bazaars in the marketplace. And to make things even more interesting, the credit crunch of that time meant that in order for his client to get the kind of build-to-suit-for-lease facility they wanted, the developer had to have the financial wherewithal already in place to do an economically feasible deal.

"We went with Majestic Realty because they were already doing a spec, 3 million sq. ft. park in Ontario," says Brent. The park included a 750,000 sq. ft. spec warehouse building. "It was too small by itself," says Brent, "But with the right to lease an additional 400,000 sq. ft. on an adjacent site, it worked."

Doing the (almost) impossible Of course, a couple of other events had to happen in order for the deal to work. Brent was also at work trying to lease World Bazaars' existing facility, a contingency to the Ontario deal getting done. And at the same time, the company was bargaining with Majestic on lease terms and building configuration. "We had two sets of negotiations going on at the same time," says Brent.

The deal, a 10-year, $29.7 million transaction, was finally completed in February. "It was a tough deal to do," says Brent, adding that, in an area known for big deals, this transaction has been cited by some as the largest warehouse deal in Ontario in the past 10 years.

"A 500,000 sq.-ft. warehouse deal in Ontario is like a 20,000 sq. ft. deal everywhere else," says Brent. In an age where warehouse facilities are continually pushing the envelope with regards to size, "It is very difficult to even find the land to build 500,000 sq.-ft.-plus facilities in Southern California - except in Ontario," he says.

Denver office market focus Just as Ontario has become the retail and warehouse Mecca for the Inland Empire, Metro Denver's office market has seen the same rebound since the late 1980s, according to Barry Dorfman, president of the Rocky Mountain region for The Staubach Co., Dallas. "The Denver office market bottomed out in 1988," he says, "but since then, office building values have increased as much as 300%."

There are two logical reasons behind the recovery. "For a time, there was no money available for new development, so the market was able to tighten up," says Dorfman. Meanwhile, "The Denver economy has become more diversified, so now, instead of relying almost solely on the oil and gas industries, we have become, among other things, the cable and telecommunications capital of the world."

Dorfman and Staubach executive vice president Joe Hollister recently completed a 250,000 sq. ft. lease involving U.S. West, a telecommunications company serving 14 Western states. The company's wireless group has consolidated several far-flung Denver locations and taken up residence in downtown's 1860 Lincoln Building, an older structure previously occupied and completely updated by previous occupant Southern Pacific Railroad.

The recovery of the downtown portion of the Denver office market lagged that of the suburbs by a couple of years, but is now fully realized, according to Dorfman. Vacancy is now in single digits. "When rates in the suburbs got into the $20 to $25 range in 1994 through 1996, buildings in downtown Denver were more in the $14 to $20 range," he says. That window of opportunity closed pretty quickly, though, says Dorfman. "Rates in these same downtown buildings are now running from $20 to $30, with the most dramatic increases taking place in the past 12 to 24 months."

While Denver landlords are enjoying the good times now, there may be some storm clouds on the horizon. "New speculative construction in this market now totals more than 3 million sq. ft.," says Dorfman. And at the same time, the consolidations now taking place among big-name players in the cable and telecommunications industries is adding some uncertainty to calculations of future demand. "We don't know exactly what will be the impact, but there may well be some give-backs of space taking place. In any event, we do anticipate a slowing of the market within the next nine to 18 months."

Deals and dot-com in SoCal Further west of the Rockies, Irvine, Calif.-based Sperry Van Ness has carved out a nice brokerage chunk in Arizona and Southern California. With new offices in west Los Angeles and Pasadena, Calif., the company has executed approximately $238 million in investment sales since January. In May, the company closed on a deal well above competing sale proposals for 106,000 sq. ft. Bristol Park Office Plaza in Irvine.

According to CEO Mark Van Ness, in the past two years the company has truly expanded into the full-service real estate realm by adding advisory services, asset management and accelerated marketing strategies, as well as property management, leasing and mortgage services.

Also in California, Tim Foutz is executive vice president in the Encino office of Los Angeles-based Capital Commercial Real Estate NAI. In addition to recently engineering a 135,000 sq. ft. warehouse build-to-suit transaction for Diamondback Bicycles, Foutz works with a number of the "dot-com" companies that are springing up in Southern California.

"We are dealing with a lot of startup Internet and computer companies - the kind that open up, go public and see their worth hit $2 billion overnight," says Foutz. The real estate needs of companies like these can change dramatically in a short period of time, he notes. "We worked with one company here that started out with only 2,000 sq. ft. less than two years ago. This January, we're moving them into a 150,000 sq. ft. facility."

The rise of computer-based businesses is yet another step in the continued diversification of the southern California economy, a process Foutz has been party to since 1971. "When I first started in the business, there was a lot of dependence on government contracts, especially in the Santa Monica and South Bay areas," he recalls.

That began to change in the mid-1980s. "We saw a lot of companies, such as Lockheed, Boeing and General Dynamics, start to lose business," says Foutz. "And as a result, the market started to experience a large amount of vacancies."

The market has since recovered and slumped a couple of times, the latest doldrums ending in 1995, according to Foutz. Now, a diverse economy may help buffer Southern California from economic misery generated by one industry.

"There is no longer any dependency on any one business sector here, which I think is really what makes this market so robust," says Foutz. "If the aerospace industry suffers a downturn, you are not going to necessarily see a downturn in the rest of the market," because the entertainment and computer industries are two of many other job generators in the market.

As a real estate service sector continually challenged by its competitive marketplace, brokers rise to the task through anticipation and strategic thinking. And as commercial real estate moves into the new millennium, the nation's crop of forward-thinking brokers will execute deals that continue to shape the industry.